At the Bretton Woods Conference in 1944, that created the World Bank and International Monetary Fund, the Western capitalist nations sought to avoid a repetition of the events that led to the Great Depression and Second World War by establishing a stable international economic order that was not bound by the rigidity of the pre-1914 gold standard system. The interwar period of 1919-39 was one of economic and politic chaos, featuring deflationary devaluations, closed trading blocs, massive unemployment and the failure of the revived gold standard in 1925-31, which were key factors in the rise of the Nazi regime in Germany in 1933 and the fascist takeover of Japan that began in 1931. President Woodrow Wilson had been an early advocate of free trade and had warned against the nationalism and autarky in economic policies that became the norm in the 1920s and 1930s. Secretary of State Cordell Hull (1933-44) had also been in this Wilsonian tradition and was one of the early architects of the General Agreement on Tariffs and Trade, although the U.S. Congress refused to join the International Trade Organization in 1950, which would have had broader and more comprehensive powers in this area similar to the later World Trade Organization. Similarly, the founders of the World Bank and International Monetary were acutely aware of the many failures of the post-World War II settlement, symbolized by the Versailles Treaty and the failure of the United States to join the League of Nations (Boughton, 2004, pp. 4-5).

In 1944-45, the architects of the new international economic system had recent catastrophes like the Great Depression and the Second World War in mind in designing institutions that they sincerely hoped would prevent these in the future. They were also aware that under the classical gold standard system the money supply had been "inadequate to finance the growth of world output and trade," while floating exchange rates had led to wild fluctuations in currency values and rampant speculation that had been destabilizing (Bordo, p. 29). Consequently, the Bretton Woods system as originally envisaged instituted a system of exchange rates that would be fixed by international agreement, carefully coordinated to ensure full employment and the avoidance of future deflationary spirals, with controls over speculative, short-term capital movements (Bordo, p. 300). In 1944, the U.S. was the world's largest creditor nation while Great Britain was bankrupt and heavily in debt to the U.S. And the Commonwealth, and these factors proved crucial in determining the form that the Bretton Woods institutions finally took. In representing Britain, John Maynard Keynes, the most widely respected economist of the day and hardly an advocate of free markets and laissez faire, recommended the creation of a world central bank or International Clearing Union (ICU) with its own currency of account called bancor. All member countries would have their exchange rates fixed to this new international monetary standard and would be able to obtain credits from the ICU based on a quota system.

Harry Dexter White, the assistant Treasury Secretary of the United States, envisioned the dollar as the main reserve currency of the world, along with a stabilization fund consisting of gold and the currencies of each member state. White pressured Britain to give up the idea of an ICU and bancor in return for a direct loan of $3.75 billion to Britain (Bordo, .p 32). As the U.S. insisted, the IMF would be based on the dollar and "would lack most of the powers of a central bank," which Congress would not have supported in any case (Boughton, 2004, p. 8). The U.S. dollar, fixed to a gold standard, therefore became the basis of the international trade and monetary system, and all IMF member states were allowed to fix their own exchange rates to the dollar with a margin of 1% of par value -- although they could increase or reduce their rates up to 10% without permission of the IMF. Initially, the resources allocated to the IMF were $8.8 billion, although in practice only the U.S. ever fixed its exchange rate to gold, and all other member states tied their currencies to the dollar (Bordo, p. 37).

In practice, the Bretton Woods system did not begin to function fully even in the Western capitalist nations until the end of 1958. The main reason was that "the transition period from war to peace was much longer and more painful than was anticipated," and the incipient Cold War and the refusal of the Soviet Union to join the World Bank and IMF meant that political, strategic and security concerns were at least as vital to the U.S. And its NATO allies as restoring some type of 'normalcy' to the international economic system (Bordo, p. 37). Stalin never joined the IMF and World Bank, while the Soviets pressured Poland to withdraw from these in 1950 and Czechoslovakia in 1954. Mainland China was not represented at the IMF after the Communist revolution there in 1949 while Fidel Castro withdrew Cuba from it in 1959. In this sense, the IMF became "largely a capitalist club that helped to stabilize market-oriented economies," particularly after West Germany and Japan were allowed to join in 1952 (Boughton, 2004, p. 8). Of the original 40 members, only three were African nations (Egypt, Ethiopia and South Africa) since almost all the others were still colonies. Ghana and Sudan only joined in 1957 when they became independent and by 1990 all of Africa's 55 countries were IMF members, although they had only 9% of the total voting power and three seats on the executive board (Boughton, 2004, p. 9).

In 1945-58, only the dollar was a fully convertible currency and most countries were short of gold and hard currency reserves, while their economies were devastated by the war and international trade had collapsed. The U.S. government was all too well aware of these catastrophic economic conditions, and feared that Communist movements would take advantage of the chaos and misery that were the norm in the postwar world. It made little use of the IMF and World Bank in dealing with what it regarded as this supreme foreign policy challenge, but with a series of bilateral and multilateral aid packages, based on direct government-to government grants and loans. Private capital movements figured very little in the formulation of these Early Cold War policies.

During this period, the IMF had virtually no role in restoring postwar stability, and lacked power and prestige. As the U.S. And its allies undertook to rebuild Western Europe after 1945 "the Bretton Woods institutions were largely bypassed" (Kahler, 1990, p. 94). In 1949, for example, Great Britain devalued the pound by 30%, followed by a wave of similar devaluations in other countries, without consulting the IMF except in the most perfunctory way. Even had it been consulted, however, the IMF staff had not "formed an opinion as to how large a devaluation would be appropriate" (Polak, 2005, p. 29). Canada also floated its currency against the dollar in 1950-61, also ignoring the policy of the IMF (Bordo, p. 45). In the 1956 Suez Crisis, the U.S. was able to force Britain to withdraw from the canal zone by applying pressure to the pound, but "the IMF was not necessary for sending the desired signals in that instance" (Kahler, p. 98). In 1967, the Labour government of Britain did notify the IMF about its plans to devalue the pound, and the IMF staff recommended a devaluation of 15%, which was close to the 14.3% finally enacted in November 1967. In addition, the IMF was able to "contain the number of secondary devaluations and thus avoid a chain reaction such as the one that had occurred in 1949." General de Gaulle did not consult the IMF about the devaluation of the franc in 1968, though (Polak, pp. 32-33).

In the 1940s and 1950s, the dollar served as the main 'private international money', which was pegged to gold at the rate of $35 per ounce. In most Western nations, capital controls also continued into the mid-1960s. Essentially, this was a dollar-gold standard system in modified form, with the U.S. playing the global hegemonic role that Britain and the pound had played up to the First World War (Bordo, p. 49). So it remained until the crisis of the 1960s and earely-1970s finally led to the end of the international gold standard and a new era of floating exchange rates. As late as August 1971, however, when President Richard Nixon and his Treasury Secretary John Connolly unilaterally took the U.S. off the gold standard, they gave the IMF a mere thirty-minute notice, and later replaced the managing director when he publicly complained about American economic policies (Kahler, p. 98). Since neither the U.S. Nor any other Western nation had ever given serious indication of abandoning the gold-dollar standard prior to this time, "the world was thus ill prepared for the 1971 crisis of the dollar." Nor had the IMF given much consideration to the…[continue]